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Playing The Volatility Game In Oil

Playing The Volatility Game In Oil

Crude inventory data from the Department of Energy (DOE) has the tendency to cause massive volatility in today’s market, with prices hovering perilously close to resistance levels; but the chances of these weekly inventory reports prompting any defining move in the market are marginal.

Crude oil markets are affected by a myriad of ‘news’ articles, reports from outfits such as the American Petroleum Institute (API) and official releases of weekly production and inventory reports, such as the U.S. government's Energy Information Administration (EIA), which comes out every Wednesday at 10:30 A.M Eastern Time, with an inventory report that today seems to serve as some sort of incomplete bible for traders, whose response to these figures tends to be exaggerated.

This weekly news doesn’t change the existing market trend unless prices are at an important juncture; however, this barrage of news does increase volatility, which the nimble-fingered trader can take advantage of and profit from.

The long-term trader and the swing trader are not essentially affected by these news events. This is a game for the day traders and the scalpers.

The trading methodology for the scalper is comparatively a straightforward one. If the inventory levels increase over the previous week, the scalper enters shorts when the news is released. If the inventory levels decrease over the previous week, the scalper enters longs on the news.

A study by TradeStation, using data from 2003 to 2011, showed that such a trade is profitable in the first five minutes of trading, that is, from the 10:30 to 10:35 A.M trading window; however, if the trade is held longer, it exhibits varied results. Related: Eni’s Arctic Field Comes Online, But Will it Ever Be Profitable?

As the day trader holds positions a little longer, he should study the markets before employing any strategy. Here’s an option that just might work today:

Crude oil: Daily chart

(Click to enlarge)

This crude oil chart shows that after running hard for more than a month, prices are facing resistance at the 38.39 to 39.02 levels and support comes in at 35.9, where bulls get aggressive. They have defended the level for almost a week, even yesterday, the drop to 35.96 was bought aggressively. Related: ‘’Iran’s Return To The Oil Markets Less Damaging Than Expected’’

Intraday chart

(Click to enlarge)

If we watch the intraday charts closely, traders seem to be waiting for the announcement before taking a confirmed position. The price is stuck in a narrow range of 36.8 to 37.06. Assuming price remains in this range, until the news, any inventory build-up that is less than expected will push the markets up towards 37.42, and if price manages to clear it, a retest of 38.39 and 39.9 can be on the cards.

However, if the inventory increase beats expectations, prices will re-set at the 36 levels, which should hold unless the number is a massive surprise. By the end of the day, the range should be maintained if the numbers are marginally above or below expectations. Related: Oil And Gas Drilling Is Now Back Off Again In This Hot-Button Play

As “chartists”, we analyse the markets and forecast probable moves. But keep this in mind always: The markets can fool even the best chartists some of the time. Nevertheless, according to the charts, the traders should expect to hit levels of 36 if the news is bearish and 37.4 if the news is bullish.

If the levels hold, traders can expect prices to move back into the range, hence, the trade can be suitably reversed if the trader finds the levels to be holding.

This is how you play the game, in case you were wondering how important these weekly inventory reports really are—and what they really mean for the market. At the end of the day, they don’t mean much unless you’re a day trader or a scalper.

By Rakesh Upadhyay for Oilprice.com

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